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Gold Prices Surge to Record Highs

NEW YORK (
TheStreet ) --
Gold prices popped Tuesday as investors turned to the metal as a safe-haven asset and momentum buying pushed prices to new all-time peaks.

Gold for December delivery settled $24.60 higher at $1,271.70 an ounce -- a record closing high -- at the Comex division of the New York Mercantile Exchange. The gold price hit a record intra-day high of $1,276.50 an ounce, $10 higher than its previous high set in June.

The
U.S. dollar index was losing 0.91% to $81.11 while the euro was gaining 1.01% to $1.30 vs. the dollar. The spot gold price was rising more than $26, according to Kitco's gold index.

Gold prices soared Tuesday on inflation worries out of the U.K. and a weaker-than-expected eurozone industrial production report.

Inflation fears jump-started the gold market in early trading after the U.K. consumer price index rose 3.1% in August from a year earlier. Economists were expecting a rise of 2.9%, but higher food, clothing and air travel moved the index higher. Gold is the go-to commodity when investors panic over inflation as gold is a form of money that retains some value. Unlike paper currencies, gold's value can never go to zero.

Gold prices were also being helped by a weaker industrial production reading out of the European Union. Activity for July rose 7.1% year over year vs. the 8% expected. Despite sovereign debt fears, the EU, led by the stronger nations like Germany and France, has been able to keep growing but today's data signaled a possible reversal or a slowdown.

U.S. retail sales for August rose 0.4% vs. the 0.3% expected but didn't seem to dampen gold's rally. Investors, trying to protect themselves against more negative news, were buying gold as a safe-haven asset.

The gold market is also subject to peer pressure buying. When the gold price moves double-digits, retail investors can jump into the market for fear of missing the boat. Technically, gold might also be reacting to buy stops in the market. If the price hits a certain level, a trader pulls the trigger and buys.

"Momentum buyers are in here as higher volume, higher close and higher open interest inspired traders," said George Gero, vice president of global futures at RBC Capital Markets.

The question is -- is this rally sustainable? Many analysts look for a close above a certain level for three consecutive trading sessions before believing a price move. Also today's massive double-digit surge could also result in profit-taking, leaving some analysts wary.

"I'm thinking maybe we back off to the $1,230s," says Phil Streible, senior market strategist at Lind-Waldock. "But historically, September is a great month for the gold market so that weakness I would definitely look at as an opportunity to the upside."

The long-term outlook for gold prices among some experts is still positive. The GFMS Research Group released its Gold Survey 2010 Tuesday; Philip Klapwijk, executive chairman, said gold could "spike comfortably above $1,300 before the year's out." Klapwijk anticipates several bouts of profit-taking but that it doesn't mean gold's bull run is over. Strong safe-haven demand will continue to support prices.

The report also noted that gold and the U.S. dollar have bucked their inverse correlation. Typically, the two assets move in opposition as a stronger dollar makes the dollar-backed commodity more expensive to buy in other currencies and vice versa. Times of real market panic have altered the dollar/gold inverse relationship as both are bought as safe havens, an alternative to stocks and "riskier" currencies like the euro.